How Rigid are Nominal Wages? Evidence and Implications for Germany*

Abstract

Many recent attempts to find evidence on downward nominal wage rigidity in micro data have suffered from problems such as composition bias and the effects of measurement error. In this paper, a model of proportional downward nominal wage rigidity is developed which avoids these problems by taking into account the determinants of wage changes and the measurement process that leads to observable earnings changes. We find a high degree of downward nominal wage rigidity in German micro data. Its real implications for individual expected wage growth, the aggregate wage level and equilibrium unemployment have marked effects for rates of inflation lower than 3 percent.

Does downward nominal wage rigidity dampen wage increases?

“…Previous empirical studies, however, which neglected the compression of wage increases, report positive estimates on the effects of DNWR on average real wage growth (e.g. Card/Hyslop 1997;Knoppik/Beissinger 2003).…”

The Missing Motivation in Macroeconomics

“…These distributions are characterized by a bunching of wage changes at exactly zero; there are some wage changes just above zero in these distributions, but almost no wage changes just below. 68 Careful studies have documented such wage stickiness in Australia, Canada, Germany, Japan, Mexico, New Zealand, 69 The following studies have all found significant signs of nominal wage rigidity: by Bewley (1999), Card and Hyslop (1997), Kahn (1997), Lebow, Saks and Wilson (1999), and Altonji and Devereux (1999) for the United States, by Fortin (1996) for Canada, by Cassino (1995) and Chapple (1996) for New Zealand, by Dwyer and Leong (2000) for Australia, by Castellanos et al (2003) for Mexico, by Kuroda and Yamamoto (2003a, 2003b, 2003c and Kimura and Ueda (2001) for Japan, by Fehr and Goette (2003) for Switzerland, by Bauer et al (2003) and Knoppik and Beissinger (2003) for Germany, by Nickell and Quintini (2001) for the United Kingdom, and by Agell and Lundborg (2003) for Sweden. 70 See, for example, O'Brien (1989) and Hanes (2000).…”

Einstiegslohne bei unvollkommenen Arbeitsmarkten

“…Mittlerweile gibt es eine aufstrebende Literatur zur mikroökonomischen und insbesondere mikroökonometrischen Fundierung von Ausmaß, Existenz und Konsequenzen von Lohnrigiditäten (Altonji und Devereux (2000), Cornelißen und Hübler (2005), Knoppik und Beissinger (2003), Fehr und Götte (2005), Pfeiffer (2003b)). Das in dieser Literatur entwickelte zentrale Konzept der (kontrafaktischen) Lohnaufschwemmung gibt das Ausmaß der durch Rigiditäten verhinderten Lohnsenkungen in einer Volkswirtschaft wieder, relativ zu einem Auktionsmarkt.…”

“…Den Ergebnissen dieser Literatur zufolge existieren Lohnrigiditäten in einem erheblichem Umfang sowohl in Arbeitsmärkten, in denen die Lohnbildung stärker dezentralisiert ist (wie den USA, Altonji und Devereux (2000) oder der Schweiz, Fehr und Götte (2005)) wie auch in Deutschland, einem Land mit einem stärker zentralisierten Lohnbildungsprozess (Cornelißen und Hübler (2005), Knoppik und Beissinger (2003), Pfeiffer (2003a, b)). Ausmaß und negative Beschäftigungskonsequenzen von Nominallohnrigiditäten haben in der Schweiz in den neunziger Jahren mit abnehmender Inflationsrate zugenommen (Fehr und Götte (2005)).…”